In this article, we’re going to talk about the 8 most undervalued small-cap stocks to buy according to analysts.

Is a Multi-Year Small-Cap Cycle Ahead?

The landscape for small and mid-cap companies is becoming increasingly exciting in light of the Fed’s recent rate cuts, which could unlock significant investment opportunities. While the Russell 2000 index has lagged behind larger averages, analysts are optimistic about the growth potential of these stocks as market conditions improve.

Many small and mid-cap companies are well-positioned to capitalize on the favorable economic environment, with innovative strategies and strong fundamentals that can drive demand and market share. As interest rates stabilize and investor confidence grows, these companies are likely to attract renewed attention from investors seeking high-growth opportunities.

With the current environment ripe for exploration, there has never been a better time for investors to consider small and mid-cap stocks. Such was the sentiment of Curtis Nagel, senior US SMid cap internet analyst at BofA Securities, who spoke on this market scenario on CNBC earlier. We covered his opinion in another one of our articles, 7 Best Small Company Stocks To Invest In. Here’s an excerpt from it:

“…he believes this could spell big opportunities for SMID-cap stocks across various sectors, including home furnishings and subscription services.

Nagel specifically pointed out Restoration Hardware, noting that it is a household name that often flies under the radar… Nagel’s overall thesis focuses on updating price targets for companies with high sensitivity to interest rates and strong prospects for revenue and earnings growth in a soft landing scenario. ACV Auctions was highlighted as an intriguing opportunity. Nagel described it as a digital marketplace for wholesale vehicles where dealerships trade cars. He noted that this market has not been fully digitized yet, placing the company at the forefront of this transition. Although the wholesale vehicle market has faced challenges, down about 25% relative to historic averages, Nagel theorized that as interest rates improve and car affordability increases, the company could see a market rebound. He views this stock as potentially overlooked but having significant upside.”

In an interview on CNBC on September 30, Nancy Prial, Co-CEO & Senior Portfolio Manager at Essex Investment Management, expressed that she expects small-cap stocks to grow, driven by rate cuts and stock-picking opportunities.

Prial noted that small caps have been outperforming in the third quarter, largely driven by expectations of rate cuts, with a 50 basis point reduction being more significant than previously anticipated. She expressed optimism that small caps have substantial room to grow, emphasizing that this could mark the beginning of a multi-year cycle for these stocks. Currently, small-cap stocks are underrepresented in the market, comprising just under 5% of the total equity market, which is at record lows. This low ownership level presents an attractive opportunity for investors.

She pointed out that small-cap stocks remain significantly undervalued compared to their larger counterparts. Prial argued that for small caps to gain traction, several conditions must be met: the continuation of rate cuts, confidence in navigating a soft landing rather than a recession and expanding relative earnings growth. She noted that relative earnings growth for small caps is starting to improve and is expected to surpass that of large caps by the end of the year.

When asked about overall market estimates, Prial acknowledged that while the S&P 500 is projected to see earnings growth of 13% in the fourth quarter and 15% in 2025, she believes small caps could exceed these figures. Despite a slight slowdown in economic growth, she maintained that small-cap stocks could achieve earnings growth rates between 15% and 20% next year. She cautioned, however, that overall indices might not reflect this growth as estimates often start high before being revised downward.

Prial also discussed her investment picks related to infrastructure and near-shoring, specifically mentioning Clean Harbors. While acknowledging its strong performance in Q3, she clarified that they do not expect new legislation from Washington to drive further gains. Instead, she believes companies like this will benefit from existing bills that are now being implemented. Additionally, she highlighted Arcosa as a “picks and shovels” play within the sector, emphasizing its role in supporting the build-out of artificial intelligence infrastructure and digitalization efforts across various industries.

Her insights reflect a bullish outlook on small-cap stocks amid changing economic conditions and anticipated monetary policy shifts. By focusing on strategic stock selection and recognizing the potential for earnings growth within this sector, investors may find compelling opportunities as they navigate the evolving market landscape. In that context, we’re here with a list of the 8 most undervalued small-cap stocks to buy according to analysts.

Methodology

We used stock screeners to look for companies trading between $1 billion and $10 billion, that’s our definition of small-cap stocks. We then found 25 stocks with a forward price-to-earnings ratio under 15, and an upside potential of over 20%. We then selected the 8 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of their analysts’ upside potential.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

8 Most Undervalued Small-Cap Stocks To Buy According To Analysts

8. Skechers USA Inc. (NYSE:SKX)

Forward Price-to-Earnings Ratio: 12.71

Average Upside Potential: 24.37%

Number of Hedge Fund Holders: 45

Skechers USA Inc. (NYSE:SKX) is a multinational footwear and apparel company that is known for its comfortable and stylish shoes, which are popular among people of all ages. It offers a variety of styles, including sneakers, sandals, boots, and slip-on shoes. The products are sold online as well as in retail stores around the world.

With nearly 5300 stores worldwide, this company grew its revenue by 7.21% year-over-year in the second quarter of 2024. Despite facing headwinds such as currency volatility, supply chain challenges in Europe, regulatory hurdles in India, and weak consumer sentiment in China (despite 3% Chinese revenue growth), the company surpassed sales expectations. Domestic sales increased by 7.7%, while international sales (~60% of the total sales) increased by 6.9%, representing around 60% of the total sales.

It invested $47.9 million in Q2 to expand its retail footprint and enhance its online sales capabilities. The company opened a total of 317 new stores worldwide, including 25 in the US, 98 in other countries, and 194 through distributors, licensees, and franchise agreements.

On September 17, Skechers USA Inc. (NYSE:SKX) and My Gym joined forces to create a special event for families: Skechers Kids Month. This month-long celebration is taking place at My Gym locations across North America, offering a variety of fun activities and giveaways for parents and kids.

Skechers USA Inc. (NYSE:SKX) has demonstrated remarkable resilience and strategic agility, overcoming significant industry challenges to deliver strong growth. The company’s innovative product lineup, coupled with its global brand recognition and operational efficiency, positions it as a leading player in the footwear market.

Meridian Growth Fund made the following comment about Skechers U.S.A., Inc. (NYSE:SKX) in its Q4 2022 investor letter:

“Skechers U.S.A., Inc. (NYSE:SKX), designs and sells lifestyle and athletic footwear. It is the third-largest footwear company in the U.S. and has a strong and growing international presence. In our view, the market does not fully recognize the growth opportunity represented by Skechers’ international business. During the quarter, the company reported strong gains worldwide, led by a 48% increase in sales in the EMEA region and a 9% rise in the APAC region despite COVID-related slowdowns, as well as 16% growth in the Americas, powered by healthy demand in the U.S. and Canada. The company is still contending with some expense issues, primarily related to ongoing supply chain and distribution channel challenges, but investors are increasingly recognizing management’s success at managing through the issues and setting the company up for potentially strong cash flow growth in 2023. Amid the growing optimism, we maintained our position in the stock.”

7. Scorpio Tankers Inc. (NYSE:STNG)

Forward Price-to-Earnings Ratio: 5.59

Average Upside Potential: 27.84%

Number of Hedge Fund Holders: 42

Scorpio Tankers Inc. (NYSE:STNG) is an international provider of the transportation of refined petroleum products. It owns and operates a fleet of tanker ships that transport products like gasoline, diesel fuel, and jet fuel. So, it plays a crucial role in the global energy supply chain, ensuring that refined petroleum products are delivered to markets around the world.

The product tanker market is experiencing remarkable strength, driven by rising global demand and shifts in refining capacity that have boosted seaborne exports. Rates have remained high for the past 2.5 years, with average MR tanker earnings reaching record levels since 1990. Seaborne exports reached a record high in June, with ton-mile demand up 14%.

The company made $373.47 million in Q2 2024 revenue, recording a year-over-year growth of 14.02%. The earnings per share in this quarter was $3.60. Year-over-year increases are notable, with LR2s and MRs both commanding $34,000 per day as Q3 begins. Strong demand is expected to continue, with an anticipated increase of nearly 1 million barrels per day in the second half of the year.

On September 3, it announced the sale of two MR product tankers, STI San Antonio and STI Texas City, for $42.5 million each. These 2014-built tankers are equipped with exhaust gas cleaning systems and are expected to be sold by the end of the year. The company has also entered into a 3-year time charter agreement for another ship at a daily rate of $29,550, starting in late 2024.

The company’s commitment to shareholder value is evident in its active share buyback program. Its consistent repurchases of its own shares demonstrate its confidence in its future prospects and its dedication to returning value to investors, making Scorpio Tankers Inc. (NYSE:STNG) an attractive investment option.